Gaga For The New Google: Wall Street Likes What It Sees From Alphabet

Forbes August 11, 2015 0

Who knew all it took was a name change to get everyone excited about Google Google again? There’s been a lot going on under the hood at the company for years, with co-founders Larry Page and Sergey Brin tapping the massive cash flows of the company’s core search business to fund a host of ambitious projects, acquisitions and so-called “moonshots.” Critics though, have pilloried the opaque way the company detailed its spending though, lamenting a lack of transparency many said was responsible for a valuation that, while high, remains below fast-growing tech rivals like Facebook Facebook

Who knew all it took was a name change to get everyone excited about Google Google again?

There’s been a lot going on under the hood at the company for years, with co-founders Larry Page and Sergey Brin tapping the massive cash flows of the company’s core search business to fund a host of ambitious projects, acquisitions and so-called “moonshots.” Critics though, have pilloried the opaque way the company detailed its spending though, lamenting a lack of transparency many said was responsible for a valuation that, while high, remains below fast-growing tech rivals like Facebook Facebook.

Google Blog

Seen in that light, Monday’s move to separate the core search advertising business (Google, YouTube and Android) from the various other far-flung ventures the company is engaged in, makes a lot of sense, with the entire collection still housed under the same roof with a new name on the door, Alphabet.

Google shares jumped on the announcement and were still comfortably higher just after noon Tuesday, albeit off the day’s highs. After briefly climbing back above $700 early in the trading session, the voting Class A shares (ticker GOOGL) were up 3.4% at $685.90.

GOOGL Chart

GOOGL data by YCharts

Wall Street analysts were quick to praise the move.

Goldman Sachs’ Heahter Bellini said the new structure “shows their desire to increase transparency which we’ve highlighted as a key issue for Google to address.” If the company actually reports financial data for each particular segment it “should help bring clarity to any profitability drag caused by its non-core assets and their trajectory.”

Mark Mahaney at RBC Capital Markets compares the potential for greater transparency at Google to similar moves executed by Netflix Netflix, Expedia Expedia and most recently Amazon.com Amazon.com with its breakout of financials for Amazon Web Services. “We have long assumed that Google’s Core Advertising segment is very highly profitable — perhaps well north of 60% EBITDA margins,” he writes. A cleaner look at the business may offer confirmation.

Citi’s Mark May mentioned the likelihood that the new structure could “foster a greater entrepreneurial atmosphere and autonomy for each business.”

Stifel Nicolaus analyst Scott Devitt went so far as to dub Google the “Berkshire Hathaway Berkshire Hathaway of the Internet” in his note Monday, comparing the new organization’s “multiple business units operating with reasonable levels of autonomy” to the conglomerate run by Warren Buffett and Charlie Munger.

The rejiggering has already resulted in an upgraded title for Sundar Pichai, who goes from senior vice president of products to CEO of Google.

While Pichai’s new title sparked headlines Monday evening, the move may also reflect the power of CFO Ruth Porat, who joined the company from Morgan Stanley Morgan Stanley earlier this year. At the time of her appointment, many observers predicted Google would foster a better relationship with investors and Wall Street, perhaps even initiating a capital return program including dividends and/or stock repurchases. That hasn’t come to pass yet, but Nomura’s Anthony DiClemente said the restructuring “reaffirms [the] view that Porat may prove a source of positive change.”

Even though Porat’s tenure is just a few months old, she drew high praise for her remarks emphasizing financial discipline on the company’s recent earnings call and DiClemente says “investors should grow increasingly confident that Ms. Porat is developing an early shareholder-friendly track record which could result in further valuation multiple expansion.”

JPMorgan’s Doug Anmuth says the structural change is an “elegant way for Google to continue to pursue long-term, life-changing intiatives” without sacrificing putting its core business in jeopardy. “On the heels of what we believe was a thesis-changing quarter for Google, the new operating structure continues down the path of increasing transparency and becoming more shareholder-friendly,” Anmuth wrote.”

Amid the high praise from analysts for Google’s new operating structure were a few notes of caution, as the company’s blog post and SEC filing didn’t promise a particular degree of disclosure around particular business segments. It’s unclear, for instance, if YouTube’s financials will be broken out under the new Google, or if the other side of the business, which houses segments like Nest, Google Ventures and the company’s healthcare efforts, will report its financials in one lump sum or in more granular detail.

Skeptics could argue that while Monday’s announcement offers some additional transparency, it still does nothing to sway the argument that core Google is the moneymaker generating billions that will be frittered away by Page and Brin’s moonshots. It’s possible the new structure will allow investors greater visibility into the potential — and perhaps profitability — of those efforts, but it is yet to be determined whether they’ll like what they see once they get a look.

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Article originally posted in Forbes website.

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